Accountancy

1. Introduction to
Accountancy
 Basic Accounting Terms
1. Business Transaction: A business transaction
is a financial transaction recorded in the books
of accounts.
Characteristics of a business transaction:
• It can be expressed in terms of money.
• It involves exchange of goods or services.
• It brings a change in financial resources.
(change in asset/liability/capital)
• It has an effect on the accounting equation of
a business.
• It has dual aspects – debit and credit.
 Business Transactions

On the basis of relationship On the basis of mode of

with the Accounting Unit settlement of value

Internal External Cash Credit

Transactions Transactions Transactions Transactions

Examples: Examples:
Depreciation Sale of goods Examples: Examples:
Cash purchases Credit
on fixed assets & assets Cash Sales
Interdepartme Purchase of purchase of
Cash payments
goods & assets goods
ntal funds Cash deposits
Loans Credit sales of
transfer Cash repayment
Loss of goods Donations of loans goods
Salaries Cash purchase Credit
by fire
of assets purchases of
assets
• Internal Transactions: Internal transactions refer to
financial transactions that occur within an
organization.
• External Transactions: External transactions refer to
financial transactions that occur between an
organization and external parties.
• Cash Transactions: Cash transactions are the financial
transactions which involve immediate exchange of
cash for goods, services or assets.
• Credit Transactions: Credit transactions refer to
financial transactions in which the buyer receives the
goods, assets or services immediately but the
payment is done on a later date.
2. Capital: Capital is the amount invested by the
proprietor in the business. It may be in the form of
cash, goods or assets. It is a liability of the business
towards the proprietor as under ‘Business Entity
Concept’ business is considered to be a separate
entity from its owners. Capital is also known as
Owner’s Equity or Net Worth.
3. Drawings: It is the amount withdrawn or goods/assets
taken by the proprietor from the business for his
personal use. Drawings reduce the capital of the
proprietor.
4. Assets: Assets are economic resources that are owned
or controlled by the organization. Assets are expected
to provide future benefits to the organization.
 Assets

Tangible Intangible Fixed Current Liquid Fictitious

Assets Assets Assets Assets Assets Assets

Examples Examples: Examples: Examples: Examples: Examples:

: Goodwill Land Cash Cash Deferred
Land Building Stock Savings Revenue
Patent
Machinery Short- Account Expenditure
Building Trademark
Furniture term Bills Preliminary
Machin Software Investments
Patents Receivable Expenses
ery Brand Copyrights Bills Debtors
Goods Value Trademark Receivable Short term
Cash Debtors
investments
Vehicles
• Tangible Assets: The assets which have physical existence are called
tangible assets. These assets can be seen and touched.
• Intangible Assets: Intangible assets are those assets which do not have
physical existence. They cannot be seen or touched.
• Fixed Assets: Fixed assets are long-term assets that are held for use in
business operations and not for the purpose of resale. These assets are
used to generate revenue and provide long-term benefits to the
business. For example – land, building, machinery etc. Fixed assets can
also be intangible assets like goodwill, patents, trademarks etc.
• Current Assets: Current assets are the assets that are held by the
business for short-term purpose. These are expected to be converted
into cash within one year.
• Liquid Assets: Liquid assets are those assets which are either in the form
of cash or can be converted into cash in a very short period of time.
• Fictitious Assets: Fictitious assets are neither tangible assets nor
intangible assets. These represent the loss or expenses yet to be written
off.
5. Liabilities: The amount owed by the business
to the external parties and to the proprietor
are called liabilities. These are the obligations
or debts that the business has to pay.
 Liabilities
Long-Term
or Short-Term
Internal Contingent
External Non- or
Liability Liabilities
Liabilities current Current
Liabilities Liabilities

Examples: Examples: Examples: Examples: Examples:

Capital Loans Long-term Short-term Lawsuits
Retained Creditors loans loans and Legal
Debentures Bills
earnings Bills Claims
Reserves Bonds payables Guarantees
Payable payable Creditors Warranty
and Bank Lease Obligations
Provisions Overdraft obligations
• Internal Liability: It is the amount owed by the business to the
proprietor of the business. It is represented in the balance sheet
as capital, profit and reserves.
• External Liabilities: It is the amount payable by a business to
outsiders i.e. other than the proprietor.
• Long-Term or Non-Current Liabilities: These are the liabilities
which are payable after a longer period i.e. More than one year.
Long-term liabilities form an important component of an
organization’s financial plans as they have an impact on a
company’s financial health.
• Short-Term or Current Liabilities: These are the liabilities which
are payable within a year. Short-term liabilities are important in
assessing a company’s liquidity and ability to meet its immediate
financial obligations.
• Contingent Liabilities: These are the liabilities which may or may
not arise in the future depending on the outcome of uncertain
events.
6. Receipts: Receipts is the amount received or
receivable for selling goods, assets or services.
There are two types of receipts.....
• Capital Receipts: Capital receipts refer to the inflow
of funds which create either liability or reduce assets
of the business. They do not affect the profit or loss
of business.
For example: Sale of fixed assets, Loans received etc.
• Revenue Receipts: Revenue receipts refer to the
inflow of funds resulting from day-to-day activities.
These are recurring in nature and these receipts
affect the profit or loss of business.
For example: Sale of goods, salaries, rent, interest
etc.
7. Expenditure: Expenditure refers to the outflow or spending of funds by
an organisation. It represents the costs or payments made to acquire
goods, services, assets or to settle liabilities.
Expenditure can be of the following types.....
• Capital Expenditure: These are the expenditures incurred to acquire or
improve long-term assets. Capital expenditures will increase the earning
capacity of the business. It will give benefit to the business for more than
one year.
For example: Building, machinery, furniture, vehicle, Loan payment etc.
• Revenue Expenditure: These are the expenditures incurred in day-to-day
operations, maintenance and administration of the business. These are
recurring expenses and short-term in nature. These are typically
consumed in within the accounting period.
For example: Purchase of goods and services, salaries and wages, rent
paid, electricity and water bills, interest paid etc.
• Deferred Expenditure: Deferred expenditure arises when a payment is
made for an expense that will provide benefits in future accounting
periods.
For example: Large advertising expenditure, prepaid rent, prepaid
insurance etc.
8. Expense: Expense refers to the payments made for the core
activities of the business. These are incurred to support the day-
to-day operations of a business to generate revenue.
For example: Raw materials, salaries and wages, rent, taxes,
insurance, depreciation etc.
9. Profit: Profit is the excess of revenue of a business over its costs
and expenses over a specific period of time. It increases the
owner’s equity. It is an essential indicator of a company’s financial
performance.
Gross Profit: It is the positive difference between the sales
revenue and direct expenses associated with producing goods.
Net Profit: It is the positive difference between the total revenue
and all the total expenses of the business.
10. Income: Income is the actual amount of money a company earns
and is available to an organization’s shareholders as dividend.
11. Gain: Gain is the profit earned on irregular or non-recurrent
activities of business. For example, profit on sale of fixed asset or
investment.
12. Loss: Loss is the excess of expenses of a specific period over its
related revenues which may arise from normal business activities
such as sales of goods or from non-recurring activities such as loss
on sale of fixed assets. It also refers to the loss incurred against
which the company receives no benefit such as cash or goods lost
in fire or theft.
13. Purchases: Purchases represent the cost incurred by a business
for acquisition of goods for the purpose of reselling or for using in
production. Purchases can be cash purchases or credit purchases.
• Cash Purchases: When the payment for purchase of goods or
services is made immediately at the time of the purchase using
cash or cheque then it is called cash purchase.
• Credit Purchases: In a credit purchase, the company acquires
goods or services but the payment will be made at a later date
after a specific period.
14. Purchase Returns: Sometimes the company may need to return
the goods that were purchased, to the seller due to issues like
defects, damages or errors in the order. These returns are called
purchase returns.
15. Sales: Sales represent the revenue generated by a company from
sale of goods or services to its customers. Sales include cash sales
and credit sales.
• Cash Sales: When the payment for sales of goods or services is
made immediately at the time of the sale using cash or cheque
then it is called cash sale.
• Credit Purchases: In a credit sale, the buyer acquires goods or
services but the payment will be made at a later date after a
specific period.
16. Sales Returns: Sometimes the customer may return the goods
sold by the company due to issues like defects, damages or errors
in the order. These returns are called sales returns.
17. Goods: Goods are the physical items or products that are
produced or purchased for the purpose of sale. Goods include the
purchases and sales in a business. Thus they are called stock-in-
trade.
18. Stock: Stock refers to the goods that are held by a business for
sale in the normal course of operations. Stock represents the
quantity of goods that a company has in hand or in its possession
at a given point of time. Stock includes the finished goods ready
for sale, work-in-progress (partially finished goods) and raw
materials used in the production process. Stock is also called
inventory. Stock may be opening stock or closing stock.
• Opening Stock: Stock in hand in the beginning of the accounting
year is called the opening stock.
• Closing Stock: Stock in hand at the end of the accounting year is
called the closing stock.
19. Debtor: A person who owes amount to the company, against the
credit sale of goods or services is called the Debtor of the
company. The amount he owes is called the debt.
20. Creditor: A person to whom the company owes amount against
the credit purchase of goods or services is called the Creditor of
the company.
21. Bills Receivable: Bills Receivable is a financial instrument or
written promise to receive payment from a customer or debtor at
a future date. Bills Receivables are created when a company sells
goods or provides services to a customer on credit.
22. Bills Payable: Bills Payable is a financial instrument or written
promise to make payment to a supplier or creditor at a future
date. Bills Payables are created when a company purchases goods
or services from a supplier on credit.
23. Voucher: A voucher is a document or piece of paper that serves as
evidence of a business transaction. For example – Cash Memo,
Invoice or Bill, Debit Note, Credit Note, Receipt etc.
24. Discount: A discount is a reduction in the original price or value of
a product or service.
• Trade Discount: The discount provided by the seller to the
purchaser for bulk purchases is called trade discount. Usually
trade discount is provided by the manufacturer to the wholesaler
or by the wholesaler to the retailer.
• Cash Discount: Cash discount is a reduction in the purchase price
of a product or service provided to a customer who pays the
amount within a specified period of time. It is an incentive offered
by seller to encourage the customers to pay promptly and improve
cash flow.
25. Business Entity: A ‘business entity’ or ‘entity’ refers to a legally
recognized organisation that engages in commercial or
entrepreneurial activities. It is a separate and distinct entity from
its owners, with its own legal rights, responsibilities and liabilities.
26. Books of Accounts: Books of Accounts refer to the systematic and
organized records maintained by a business to record financial
transactions. Journal and Ledger are called the Books of Accounts.